October 23, 2017 / 4:18 PM / 5 months ago

Fitch Affirms NN Group's IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 23 (Fitch) Fitch Ratings has affirmed NN Group N.V.'s (NN) core life insurance subsidiary Nationale-Nederlanden Levensverzekeringen Maatschappij N.V.'s Insurer Financial Strength (IFS) rating of 'A+' (Strong). The agency has also affirmed NN's Long-Term Issuer Default Rating (IDR) of 'A'. The Outlooks are Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS The affirmation is driven by NN's very strong capitalisation and leverage and business profile. Fitch assesses NN's profitability, although stable, as a rating weakness. NN's capital position remains a key rating strength despite the group's key metrics weakening following the acquisition of Delta Lloyd N.V. (Delta Lloyd) on 7 April 2017. The group's capital position continues to compare favourably to most European peers on both a Prism factor-based model (Prism FBM) and a Solvency II (S2) basis. Fitch expects the group's Prism FBM score, including Delta Lloyd, to fall to 'Very Strong' in 2017 from 'Extremely Strong' at end-2016. NN's consolidated S2 ratio fell to 196% at end-1H17 from 241% at end-2016. NN's financial leverage remains commensurate with similarly rated peers, and we expect it to improve as a consequence of capital generation and future debt maturities. NN's financial leverage ratio increased to 30% at end-1H17 from 22% at end-2016, driven by an increase in debt financing related to the acquisition of Delta Lloyd and the consolidation of Delta Lloyd's existing debt. The Delta Lloyd acquisition is favourable to our assessment of NN's business profile, as we believe the transaction further improves NN's strong market position in the Dutch insurance market across various lines. The acquisition is also consistent with NN's strategy of being an insurance leader in the Dutch market. For example, the transaction firmly establishes the group as a top-two player in the competitive Dutch non-life insurance segment. However, both NN and Delta Lloyd have significant exposure to the challenging Dutch life sector. Fitch expects NN to realise significant capital synergies and cost efficiencies out of the acquisition of Delta Lloyd, given the considerable overlap between the businesses in the Netherlands. There are execution risks in integrating the acquired business and realising the planned synergies. However, Fitch believes NN has the necessary expertise and track record, particularly in expense management, to execute the transaction successfully. NN's profitability is strong with a Fitch- calculated net income return on equity (ROE) of 6% (2015: 8%), which we expect to remain stable in the 5%-8% range. However, ROE remains below our criteria median of 9% for insurers rated in the 'A' category. NN's profitability is weighed down by historically low bond yields, consistent with most of its similarly rated peers. The successful integration of Delta Lloyd (2016 Fitch-calculated net income ROE: 9%) is a key risk in the medium term, but we expect the group to closely manage integration risk, thereby enabling its earnings to benefit from the realisation of synergies. NN plans annual cost synergies of approximately EUR150 million by 2020 from the Delta Lloyd acquisition, in addition to the standalone NN and Delta Lloyd cost savings targets. NN's investment exposure is conservative and supported by a risky assets to equity ratio of 38% at end-2016. General account assets, where NN bears investment risk, are predominantly invested in fixed-income securities and mortgages, largely rated 'A' or higher, with adequate diversification by region and issuer type. We view NN's variable annuity (VA) and guaranteed pension risks as manageable, particularly in light of the group's capital strength, its hedging programme to mitigate financial market risks on these businesses, and a rapid run-off projection of the Japan closed block VA book. However, NN does not separately hedge market risks related to performance guarantees on some unit linked policies. NN has applied its own accounting principles and key reserving assumptions to all Delta Lloyd entities. Fitch believes that NN's overall non-life reserving practices are prudent. However, recent reserve run-off results have been unfavourable, driven by a EUR40 million reserve strengthening (about 1% of end-2016 gross reserves) in 1H17 for bodily injury claims related to NN's property & casualty business. NN is a leading player and household name in the Netherlands, with its footprint in the rest of Europe and Japan adding a degree of diversification. The group generated 59% of its premium outside the Netherlands at end-2016. NN's European insurance business, which excludes its Dutch operations, contributed 16% to the group's pre-tax operating result in 2016. NN Life Japan is a top-three player in corporate-owned life insurance products, and contributed 13% to the 2016 pre-tax result. RATING SENSITIVITIES The ratings could be upgraded if, on a sustained basis, financial leverage improves to below 24% and net income ROE rises to above 8%, while NN's Prism FBM Score remains at least 'Very Strong'. Conversely, the ratings could be downgraded if, for a sustained period, financial leverage increases to above 32% or net income ROE falls to below 5%. The ratings could also be downgraded if capitalisation weakens significantly, as measured by a fall in the Prism FBM score to below 'Very Strong'. FULL LIST OF RATING ACTIONS Nationale-Nederlanden Levensverzekeringen Maatschappij N.V. --IFS rating affirmed at 'A+'; Outlook Stable NN Group N.V. --Long-Term IDR affirmed at 'A'; Outlook Stable --Senior debt (XS1623355374) affirmed at 'A-' --Senior debt (XS1623355457) affirmed at 'A-' --Senior debt (XS1550988569) affirmed at 'A-' --Senior debt (XS1204254715) affirmed at 'A-' --Subordinated (XS1550988643) affirmed at 'BBB' --Subordinated (XS1028950290) affirmed at 'BBB' --Subordinated (XS1054522922) affirmed at 'BBB' Contact: Primary Analyst Willem Loots Senior Director +44 20 3530 1808 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson Federico Faccio Senior Director +44 20 3530 1394 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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